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Bear Stearns Notes - 3/6/08 to 3/14/08Steve Spurry

Thursday March 6

1. J. Giles, K. Silva, and S. Spurry had regularly scheduled update with R. Upton and J.Stacconi (Bear Treasury):

• Bob Upton discussed his concern that, with heightened dislocation in the markets, itfelt like they (I interpreted as all market participants) were falling back into aNovlDec like liquidity constrained environment. As a result Bear was focused onshrinking balance sheet and increasing the HC liquidity pool.

• CP market was not terribly robust and as a re;sult $1.5 B oftheir $3.8 CP outstandingwas overnight.

• Equity Repo was holding up pretty well. Bear lost a large repo facility, AbbeyNational, because the institution decided to no longer provide secured funding to thestreet (Bob noted that this was not Bear specific). Bear had $650 million in equityTepos with them, and were able to replace this facility with two new lines-AmericanBeacon and Credit Suisse. Bear had $27 billion in domestic equity repo outstandingwith $4.5 billion ofthis being overnight. This number had been fairly stable formonths .

• After their earnings they were hoping to be able to increase term CP and term repo

• The firm's last 10 year bond issuance, which went out at Treasury + 362 (or LIBOR +302) was trading at Treasury + 460 (LIBOR + 390). Because ofthe significantlywider spread, Bob felt it was unlikely that Bear would do a large deal between thenand March 30th

• Ifspreads tightened, they wanted to issue debt in the 2nd quarter.However, at the end of January they had $5 billion Net Cash Capital (they hadn'tcalculated NCC for Feb month-end yet).

• We also discussed strategic initiatives (see 3/6 write up).

2. Liquidity held steady versus prior day: HC Only = $17.3 billion and Total = $21.4billion

Friday March 7• PC Only Liquidity Pool falls to $15~8 billion and Total Liquidity to $18.3 billion.

Monday March 101. Matt Eichner, Jim Giles, and Steve Spurry have end ofday call with Bob Upton (John

and Pat?):• Focus was less on change from Thursday to Friday or Friday to Monday than what

they were seeing from Monday going forward (they lost essentially nothing from

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Friday to Monday and thus I believe the biggest thing causing the $3 billion dropfrom Thursday to Friday was Free Credit out).

• Bob Upton explained that hedge funds are starting rumors and creating difficulties.He notes in particular Lek Securities - which we also saw on Bloomberg. I believehe said Lek's name seemed to keep coming up.

• For FI Repo, Equity Repo and Unsecured debt, some lenders signaled their intent tostep away. Bob said that some ofthe guys who were stepping away had been withBear through thick and thin up until this point.

o FI Repo desk had $3 billionish pulled, but they were trying to minimize theend ofday loss by using excess facilities and seeking replacement funding

o One Equity Repo lender ($200 million) said they would not roll (out of $2.9billion total overnight). Another lender of$1 billion said the firm had a creditcommittee meeting scheduled for the next morning to discuss whether theywould roll. A third lender signaled that they would not roll $500 million onWednesday.

o Bob also talked about Free Credits from the previous day or two, I think it wasthat there had been $25 billion out over the previous two days (Jim?).

• PC Only Liquidity ended at $15.8 billion and Total Liquidity ended at $18.1 billion

• Pat Lewis provided a worse case analysis for the next day, which showed the WorseCase Parent Company only liquidity pool falling to $9.21 billion. This did notinclude any Free Credit outflows (which was viewed more as a short term issue thatcould be dealt with by pledging customer securities and possibly doing an intra-weekC3 calc).

Tuesday March 111. PC only liquidity fell to$9.3 billion and Total Liquidity fell to $11.5 billion.

2. Matt Eichner, Jim Giles, (Kevin Silva?) and Steve Spurry have another end of day callwith Bear Treasury:• Persistent rumors continued. We heard from Bear Treasury as well as the Fed that

there were rumors that Bear had failed to deliver customer money (Free Credits), wasmissing margin calls, failing to deliver cash to settle trades, some banks weren'ttrading with them, etc. Bob Upton said there was no merit to any ofthe rumors~ Healso said that other dealers were moving their marks on trades with Bear and asaresult Mike Alix had been working on mark (collateral) disputes all day.

• Drivers ofthe liquidity reduction:o They lost $1.9 billion inequity repo from three counterpartieso FI Repo lost $350 million in whole loan money it couldn't replaceo 750 million in CPo $690 million in bank loans ($450 ofwhich they said they chose not to roll).

They also increased non USD bank loans by $250 million;

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o They lost another $2.5 billion in Free Credits (they were re-doing thecalculation that night to free up the money for Thursday).

o The C3 deposit for that day went up by $3 billion, but this was largely offsetby $2.4 billion in cash they got in from MTM (stock loan/borrow I believe.was a big driver.

• Bear was interested in the Fed's term auction facility.

Wednesday March 121. I was in NYC at the monthly GS meeting. Goldman's credit department was veryfocused on Bear and Craig Broderick (CRO) seemed very concerned and upset at thingsgoing on in the market (i.e., rumors).

2. In the morning Matt Eichner talks to Bear's Mike Alix:

"r just got a heads up from Bear that they are likely to reach out tosome of the other CEOs of dealer firms to reiterate their commitment towork with them to the extent that hedge fund counterparts are lookingto assign OTC trades. Some of this occurred already yesterday,particularly with the CSEfirms, more at the CRO level. The concern isthat if there is a perception that other dealers hesitate to acceptassignments that could lead to people looking to assign sooner ratherthan later, an unhappy event. They wanted to give a heads up just incase we heard murmurs about their reaching out, and just wanted us toknow their message."

3. Matt Eicher, Jim Giles, and :Kevin Silva have another end ofday call with BearTreasury, and Matt Eichner talks with Mike Alix afterwards:

"They were at $11.3 of excess liquidity yesterday night. (John had predicted an additional $700mm on the call yesterday but that apparently didn't materialize.)

They lost $70 million of CPand $240 million of bank loans. They picked up $1.4 billion ·ofadditional overnight equity repo. They shipped $800 to the finance desk. They had to post anadditional $2.2 billion of collateral for stock borrows from yesterday's market gains. And $1.2billion of free credits left. All of this together reduced liquidity by $3.1 billion, leaving them with$8.2 billion. .

Upton believes that they will be able to get $4 - $5 billion tomorrow from 15c3-3 lock-up. Hesuggests that they will be doing the computation on a frequent basis, as long as there are freecredits leaving.

Of significant concern, they heard rumblings late in the day that some of the large money funds(notaoly Fidelity and Melon) were becoming hesitant and might not roll repo tomorrow. Upton,who had been tied up in meetings all day, was going to speak with them and ascertain what sortof reassurance might be proVided. The immediate impact of the money funds leaving would be$1 -$2 billion of additional financing for the repo desk. But the signals would be awful and, asJim noted, some of these money funds may also be term repo counterparties.n

They finish the day with $8.7 billion in total liquidity, but expect $4.1 billion to be released fromthe C3 Deposit in the morning. .

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4. Matt Eichner talks with Mike Alix afterwards:

"heard from Mike Alix..... He said that his reaching out to the dealer community this morning hadgenerally been positively received. He noted, however, that Bear has adopted a pay first and askquestions later approach to disputes on assignments. To wit, they paid $1.1 billion in disputes to142 counterparties today (all ofwhom he believes could pay Bear back if that becomesnecessary)."

Thursday March 131. fu the moming Matt Eichner leams from Mike Alix that Alan Schwartz (the CEO)called Tim Geithner on Wednesday night to talk about possible Fed flexibility in theevent that some repo counterparties (i.e. the money funds referenced above and below)do indeed pull away. Mike apologized that the SEC was not first notified. Mattrecommends that Erik Sirri and others speak with Bear senior management.

2. $3'.6 billion in cash is reJeased as a result ofthe recalculation ofthe C3 deposit - Bearstarts the day with $12.4 billion in liquidity.

3. Around 10:00 to 10:30 am, Eric Sirri, Bob Colby, Matt Eichner, Tom McGowan, andSteve Spurry have a call with Bear Steams senior management - Allan Schwartz andSam Molinaro (Allan doing most of talking):

• Acknowledged calling Tim Geithner late Wednesday night and apologized for notcontacting SEC first (discussed with senior Bear committee before cal1ing Fed?­can't read my notes in terms ofwhich committee).

• Discussed some ofthe funding they had already rolled (or not) that morning:o $2.5 out of $2.9 equity repo rolledo Some bank loans in London rolledo Had rolled almost all of $2.5 ofbank loans in the US (correct? ­

inconsistent with end ofday result)o They 10st$4 to $4.5 in repo from money funds, abouthalfofwhich was

agency and thus-they expectedto replace (Fidelity stepped away on non-Agency but rolled its Agency line) ~

• As ofthen they hoped to finish the day with $10 to $12 billion in cash.

• Noted the flight ofFree Credits ($6.5 to $7.5 recently) as well as people movingentire positions (debits also).

•• Allan said the problem was they simply "cannot get iri front of the rumors". Hesaid senior people at the other dealerslbanks were saying they were open for

. .

business with Bear, but that individual desks were starting to refuse the Bearname - both in terms ofdirect trading and assignments. He also mentioned thatevery time one hedge fund can't assign away from Bear it tells five others.

• We (Eric Sirri I believe) inquired about any discussiOlls they were having at themoment in terms of capital infusions. Allan said there were no "terribly current

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discussions". They had hired Lazard to advise them but that was on "slow bum"and that with the time it would take to get that done it wouldn't help (rumorswould cause more damage in the meantime).

4. At 3:30 PM the same group as above from the SEC (plus Mike Macchiaroliand Ibelieve Randal Roy) have call with NY Fed - including Tim Geithner and Bob Steel~

o Tim began by saying that Bear was "past the point of no return". Hediscussed how it was time to start thinking about what was best for thebroader market versus what was best for Bear Steams.

o· Matt Eichner asked Tim to expand upon what options he had in mind alongthese lines. Tim said he was wondering whether Bear needed a bigger push toraise capital, sell assets, and get assets fmance on more stable terms - even ifit meant "loosing some control over their own fait".

o Someone from the NY Fed asked if there should be a Principals meeting orcall the next day. We (I believe Eric) said not yet and that we should have amid-day conversation.

It sounded as if the NY Fed had more recent information than us, so we reached out toBear Treasury.

5. We got in' contact with John StacconL So far they had lost:• $1.5 billion in free credits• $300 million ofEquity Repo (they hadso far rolled $2.5 B of$2.8)• $0 FI Repo (lost $500 to $1 billion but had replaced it all). Note this is not

entirely consistent with the FI repo discussion in #3 above or #7 below.

6. Matt Eichner got a call from Craig Broderick at Goldman Sachs. Goldman was havingan impromptu Management Committee meeting in the morning to discus Bear. Theywere still 9pen for business with Bear across the board, and Craig thought it would staythat way, but it was clear that Bear was in a tough spot (loosing access to CP ifnotfinancial institutions). Craig said Bear had been behaving well in making marginpayments.

'7. We had an end ofday call with Bear Treasury and Mike Alix. It was a worse day thenthey expected. They lost:

• $350 million in Equity Repo• $1.8 in FI Repo (again inconsistent with 5 above)• $3 billion in ·free credits• $800 to $900 million on derivates collateral (and had post $1.1 B the night

before)• $1 billion US Bank Loans: a $500 million reduction in a secured bank loans·

with chase and reduction in their with Citi as well• $400 million London Bank Loans• $20 million CP

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Thus they had lost over $7 billion in liquidity and were down to $5.9 billion inliquidity ($5.1 at the parent and $800 million at BSIL).. In addition, they had a bankloan of $1.2 billion with Citi and were on overdraft. Thus they were going to bebelow $5 billion starting in the morning (latter they said they were only going to have$2 billion - but this apparently had to do with Citi debiting them twice on the $2.4overdraft - the next day they actually started with cash of $4.8).

In addition, they were facing a number of funding requirements for the next day (e.g.'3$9 to $10 billion in non-agency collateral to roll, $2.5 in equity repo, $500 million inCP, $2 billion in bank loans). Even if they rolled everything they would still be below$5 billion.

We askedabout what they had done (sales etc.) and what they were going to do. Theyhad sold very little up to that point. They said:

o They had compiled a list ofcollateral that could be sold - although thiswouldn't settle same day.

o They were looking at around $10 billion in C3 deposit coming back next week(and would substitute some firm collateral for customer collateral the nextday)

o They had $6 billion in bank lines they could draw

Bob (correct?) said if things "miraculously stabilize tomorrow" they would "muddlethrough".

Thus the only plan they seemed to have was to tap their bank lines the next day (Friday) .and/or try to arrange some special same day settlement on some asset sales. Mike Alixasked us about what we could do with them in terms ofmonetizing the C3 receivablewithout the time delay (he said that could make the difference).

8. Another Call with NY Fed and US Treasury people - where Mike Macchiaroli sayswe are thinking about Chapter 11 for the Holding Company.

During this Mike Alix calls Matt Eichner and says they are wondering how they aregoing to open for business and they were not sure if they could operate normally. Mattpasses a note to Mike M and Mike suspends the call with Fed and says wants to talk toBear again.

9. Another call with a broader group ofBear Steams folks (Sam, Allan, J Farber, MikeAlix, Upton, etc.) .

o They are going to have $2 billion in cash in the morning (again - Citimistake/issue).

. 0 Thinking about how they are going to open up for business in the morping,They think they either need some sort of liquidity facility or they have to put theHC in bankruptcy and try to operate the subsidiaries. Talks with other firms forcapital are too preliminary. They think they need at least a $5 billion liquidityline to open for business.

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o This has been a "run on the bank in so many ways". They were taken bysurprise by the amount ofcash that went out today (much more than theyimagined could have gone). They noted how they were getting hammered onaTC marks by dealers and had been posting to try to buy some goodwill, butthat just led to counterparties calling for more collateral.

Mike Alix calls Matt Eichner and tells him they are calling the Fed.

10. They actually open Friday morning with $4.8 billion in cash

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